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Due diligence

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The due diligence stage of the business buying process is typically thought of as being the point when the buyer will have complete access to all of the company's books and records.

I prefer to refer to it as the point when the seller has to lay all their cards on the table. Interestingly enough, over 50 percent of small business purchases collapse in due diligence and never get to closing.

While there are a range of reasons for this dismal statistic, the most common ones are because the buyer simply cannot gain comfort closing the deal given the lack of information, or they have uncovered problems with the business that were not previously disclosed.

Having sold nine of my own businesses and after having been involved as a broker or advisor in hundreds more, I have seen first-hand how some sellers can undo a deal simply because they are poorly prepared for the process.

It is paramount to open up the business to the buyer at this stage. This is not the time to posture and negotiate about what information you are, or are not prepared to provide. If a seller makes this stage transparent, the odds of getting the deal close will rise exponentially.

Have the buyer provide you with a detailed list of all of the documents they wish to review, and any other aspects of the business they wish to investigate. If there is anything on the list you are not comfortable in providing, you need a valid reason. At the same time, a seller needs to realize this is the last stop for the buyer, and so there may be some requested items that you feel are "unacceptable", whereas in the buyer's mind, it makes perfect sense.

These taboo items usually involve a buyer's request to speak with employees, customers, or suppliers. Now, it is certainly understandable for a seller to be apprehensive about allowing this to happen. On the other hand, consider whether or not it would be something you would want to review if you were the buyer. If the answer is 'yes", then you have to allow it. For example, if you have a limited number of clients that contribute a disproportionate amount of the revenue, the buyer needs to be assured that this relationship will endure after the sale. If they cannot meet the clients, it will invite a performance laden deal which could hurt the seller. However, you can do it tactfully.

If there are some of these sensitive issues, the parties should agree to address them in stages. First, the buyer should review the usual financial records, contracts, and other customary documents. Once they have signed off and agreed to these issues, you could move on to the more sensitive ones. Meeting with suppliers or customers can sometimes be accomplished by having the buyer accompany you as a salesperson in training. For employee issues, it is only necessary for the buyer to meet key personnel who have to remain with the company after a sale in the buyer's mind. Here too you can introduce the buyer as either an outside consultant, or potential investor, or as a candidate to open a second location. There are a number of ways for you to present the buyer without jeopardizing confidentiality.

While some buyer's due diligence requests may first strike you as unacceptable, they ultimately have to be in a position to pull the trigger and get the deal closed. Both parties will have risks in the deal and if your goal is to sell your business, especially in these uncertain times, you need to do everything possible to help get the buyer to the finish line. Providing them with documentation that validates what you have represented, and allowing them to investigate the various aspects of the business to be certain it can be sustained under their ownership are the most effective ways to get through the due diligence process.

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